Monday, February 9, 2015

The SBA and frustraneous

SBA 7(a) loan
volume has totaled $6,489,661,500 since the government’s fiscal year began
October 1st. This is a 26% increase over the same period last year.

The proposed
budget for next year calls for SBA to support $21 billion in loan guarantees for
the flagship 7(a) program, the biggest such request in history.

This is not a
frustraneous use of taxpayer dollars. For fiscal year 2016, the administration
contemplates a $701 million budget for SBA, less than the $733 million Congress
granted it for the current year.

But the proposed
cuts appear to have more to do with improved loan performance rather than a
reduction in programs or services. There is $0 in taxpayer subsidy for the SBA
guarantee loan programs.

The debenture rate
is only 2.52% but note rate is 2.56% and the effective yield is 4.60%.

________________________________________________AHEAD
OF THE YIELD CURVE

The economy is not
as frustraneous as it once was.

The U.S.
labor market leaped forward in January, capping the greatest three-month jobs
gain in 17 years. Payrolls advanced by 257,000 last month following increases
in December and November that were even bigger than previously reported.
Employment in November was revised up to a 423,000 gain, the most since May
2010. Payroll gains averaged 336,000 over the last three months, the strongest
since 1997. Total employment is now 2.5 million above the previous peak and up
11.2 million from the employment recession low.

Last time the
Federal Reserve met, they said that they could be “patient” on raising interest
rates. The Fed also dropped a clause from its December statement that the
assurance of patience was consistent with a previous pledge to hold rates low
for a “considerable time.”

So how long before
the Fed loses patience and starts to raise interest
rates?

Eurodollar futures
settle at a three- month lending rate that has averaged about 22 basis points
more than the Fed's target over the past 10
years.

Here is a summary
of what the market expects for Eurodollar futures based upon the pit-traded
prices at the Chicago Mercantile
Exchange:

DEC15-
0.865

DEC16-
1.66

DEC17-
2.125

DEC18-
2.37

DEC19-
2.54

DEC20-
2.69

What does all this
mean?

I don’t
know.

Eurodollar futures
currently imply a federal funds rate well below the indications of just three
months ago. For example, the December 2020 rate is now 66 basis points
lower.

Keep your eyes and
ears open for this week’s auction of 30 year Treasury bonds.

After the Fed’s
meeting, the 30 year Treasury bond dropped 10 basis points to 2.30 percent, an
all-time low.

Last month’s
auction of $13 billion in 30-year bonds drew a yield of 2.430 percent, below the
previous record of 2.580 percent in July 2012.

After the jobs
report on Friday, the 30-year Treasury added 10.1 basis points to
2.523%.

This distinct
flattening of the long end of the yield curve implies investors are rethinking
the timing of Federal Reserve interest-rate hikes.

__________________________________________OFF
BASE

If
it ends up being a frustraneous week, go ahead and take Monday
off.

It’s
Washington’s Birthday!

Officially it is
Washington’s Birthday and NOT “President’s
Day.”

In 1968, Congress
passed the Uniform Monday Holidays Act, which moved the official observance of
Washington's Birthday from February 22nd to the third Monday in February. An
early draft of the Uniform Monday Holiday Act would have renamed the holiday to
"Presidents' Day" to honor the birthdays of both Washington and Lincoln,
sinceLincoln’s is
February 12th. This proposal however failed in committee and the bill as voted
on and signed into law on June 28th 1968, kept the name Washington's
Birthday.

According
to the Federal Reserve, here are our holidays for
2015:

Washington's
Birthday February 16Memorial
Day May 25*Independence
Day July 4Labor Day
September 7Columbus
Day October 12Veterans
Day November 11Thanksgiving
Day November 26Christmas
Day December 25

*Independence
Day this year falls on a Saturday – so the Board of Governors is closed on July
3, 2015 and bankers get a three day weekend!